Most countries have a progressive income tax structure. This means that the tax rate paid by individuals increases as they earn higher wages. The top income tax rate is applied to the share of income that falls into the highest tax bracket. If a country has five tax brackets with a top income tax rate of 50 percent at a threshold of €1 million, then each additional euro of income over €1 million would be taxed at 50 percent.
Individuals in the top tax bracket also pay social security contributions or payroll taxes. These are typically flat-rate taxes levied on wages and are additional to the tax rate on income.
Workers recognize the impact of marginal tax rates and thresholds when deciding whether to work an additional hour or whether to take a new job paying a higher salary. High marginal tax rates can make additional work more expensive and lead to individuals deciding to stay in less productive positions or choosing not to work. When high tax rates increase the cost of labor, this has the effect of decreasing hours worked, which decreases the amount of production in the economy.
Estonia (21.3 percent), Latvia (21.4 percent), and the Czech Republic (31.1 percent) have the lowest top income tax rates of all European countries covered. The countries with the highest top income tax rates are Slovenia (61.1 percent), Portugal (61.0 percent), and Belgium (60.2 percent).
The threshold at which the top income tax rate applies also plays an important role. Both the top tax rate and threshold can determine the amount of tax revenue raised by the top bracket. For instance, if a country has a top income tax rate of 50 percent on income over €1 million, only a small number of high-earning taxpayers will pay that rate and it may not generate significant tax revenues. In contrast, a top income tax rate of only 20 percent on all income over €10,000 would apply to most taxpayers, implying a broad income tax base and higher tax revenues from the top tax bracket.
The top income tax threshold can also be expressed as a multiple of a country’s average wage. While a low multiple indicates a flatter tax structure, high values signify more progressive tax systems.
Source: OECD (https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I7), Tax Foundation calculations. (a) This all-in marginal rate is calculated as the additional central and sub-central government personal income tax, plus employee social security contribution, resulting from a unit increase in gross wage earnings at the earnings threshold where the top statutory personal income tax rate first applies. It takes account of the effects of tax credits, the deductibility of sub-central taxes in central government taxes, etc.
(b) The average top threshold wage was converted to euros for countries that have a national currency other than the Euro. The average 2017 exchange rates provided by the European Central Bank (ECB) were used for the conversion. For Iceland, the ECB did not publish the average Euro-Icelandic Krona exchange rate for the year 2017, therefore the 2018 average was used.
|Country||Top Marginal Income Tax Rate (in %) (a)||Top Marginal Income Tax Threshold (in Euros) (b)||Top Marginal Income Tax Threshold (expressed as a multiple of the average wage)|
|Czech Republic||31.1||€ 4,694||0.3|
|Slovak Republic||35.1||€ 40,441||3.5|
|United Kingdom||47.0||€ 171,103||3.9|
Hungary applies a flat tax of 33.5 percent on all income earned, setting the top income tax threshold to €0. Latvia (€804) and Estonia (€2,196) are the countries with the second and third lowest top income tax thresholds, respectively. In contrast, France (€562,377), Portugal (€361,936), and Austria (€280,900) have the highest thresholds for their top income tax rates.
Because Hungary applies a flat tax on all income, top income earners are subject to the same tax rate as average income earners. On this measure, Portugal has the most progressive tax system, with a top income tax rate that applies at 15.6 times the average income.
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